Friday, May 23, 2008

Ford Announces Production Cuts, Sees Expensive Gas Long-Term

By Chris Haak


Yesterday, Ford made the business news wires for the types of reasons that companies dread - they had to announce bad news. The news was that they expected to basically break even during 2009, while they had originally expected to begin turning a profit that year. The cause, of course, is twofold: the difficult auto market, combined with Ford's currently truck- and large vehicle-heavy lineup.

Although this is clearly not good news for Ford, it also could be a lot worse. The news would be much worse if Ford had said that they expected to lose money in 2009, instead of basically breaking even. Or worse still, Ford could have said that they were announcing multiple expensive incentive programs to keep the factories humming, in spite of losing money on every vehicle they produce. Instead, the company, under the leadership of CEO Alan Mulally, appears to be under no delusions about its likelihood of sales success without a better selection of small, efficient cars, so is trimming production to appropriate levels.

Overall, Ford is cutting production by 15% for the second quarter 2008 compared to last year, plus a 15-20% reduction in the third quarter, and approximately an 8% reduction in the fourth quarter. The production cuts will also mean job cuts, although the company did not have immediate specifics of how many jobs would be cut, and from where.

According to Mr. Mulally, the "tipping point" (there is an excellent book by Malcolm Gladwell, by the way, with the same name) in the market - where consumers really started to abandon the SUV and pickup markets, came when gas prices reached $3.50 per gallon. According to Automotive News, the market share of SUVs fell from 5.2% in April to 4.4% through the first half of May, and down from 8.4% in 2007. Pickups saw their market share fall from 11% in April to 9% in May (and down from 14.1% in 2007). So basically, as a share of all new vehicles, SUVs have lost almost half of their sales since 2007 (from 8.4% to 4.4%) while pickups have lost almost a quarter of their market share.

There's more decent news for Ford as well. Although truck and SUV production will be curtailed significantly during the remainder of 2008, many of the company's car and crossover models, including the Focus, Fusion, Edge, Escape, Milan, Mariner, MKZ, and MKX, will see their production increase compared to 2007's levels.

Many folks wondered where the tipping point would be that would finally make consumers throw up their hands and give up on gas guzzling V8s as personal use trucks. Ford believes the answer to that question is $3.50, but I believe that each person has a different breaking point, while some - who can afford the extra expense or can't live without cubic inches - may not have any tipping point that changes their behavior, or at least a price so stratospherically high (as in $10+ per gallon) that they will continue to buy pickups and SUVs instead of cars and crossovers.

Although it's definitely a shame to see Ford having to cut back production plans, I applaud the company for taking the appropriate steps to ensure its future survival and taking a pragmatic approach with regard to fuel prices and the economy. According to Automotive News, Ford's projected range of gas prices during 2008 and 2009 range from $3.75 to $4.25 per gallon, and staying there for a while. Unfortunately, they're probably right, unless gas goes past
$4.25 per gallon.

The Fiesta can't come to North America soon enough for Ford.

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